July 20, 2017 / 4:49 PM / a year ago

Central banks have no choice but to keep the faith

LONDON (Reuters Breakingviews) - Central banking increasingly looks like an act of faith. The president of the European Central Bank, Mario Draghi, and his Bank of Japan counterpart Haruhiko Kuroda have spent trillions of euros and yen without generating as much inflation as they want. Yet they have little choice but to insist their policies will eventually work.

European Central Bank (ECB) President Mario Draghi arrives to attend a European Parliament economic and monetary affairs committee meeting in Strasbourg January 16, 2012. REUTERS/Vincent Kessler

The euro zone is finally experiencing a robust recovery and the only thing lacking is a pickup in wages and inflation, Draghi said on Thursday. On the other side of the globe, Kuroda is playing the same waiting game. The BOJ raised forecasts for growth in the world’s third-largest economy on Thursday. But it lowered its projections for inflation, postponing by a year the timetable for hitting its 2 percent target. It’s the sixth delay since Kuroda launched the BOJ on massive purchases of government bonds and other assets in 2013.

Both central bankers insist their policies will work in the end: Draghi cited the need for persistence, patience and prudence several times. Yet they have no way of knowing for sure whether the failure of stronger growth to feed through to higher wages and inflation is due to temporary or deeper structural reasons.

The financial crisis may have damaged the economy in ways that take a long time to heal. Productivity growth has slowed and it’s unclear whether it will bounce back. The labour market may also contain more slack than headline unemployment rates suggest. A recent ECB working paper said 3 percent of the euro zone’s working-age citizens were spending fewer hours at work than they would like. A further 3.5 percent are labeled inactive but are actually just competing less actively in the labour market. Meanwhile, workers may be more concerned about landing – or keeping – a secure job with good benefits, rather than pushing for higher pay.

There is more than a trace of doubt about how long such factors will hold back inflation. But central bankers cannot admit uncertainty if they want households and investors to remain confident. They can only keep the faith, and keep trying.


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